Gain Sharing Vs. Profit Sharing

Gainsharing

MLR601

April 5, 2007

Gainsharing and Profit-sharing are incentive plans that are designed to pay employees incentives based upon good company performance. By using these plans, companies found that employees are motivated to stay with the company longer. Because employees can directly affect the output of a company they will also work harder to achieve selected goals when incentives are attached. However, incentive plans are not appropriate for every company and business must find a way to put the plan to good use in a fair and productive way.

Gainsharing Vs. Profit Sharing

Gainsharing and profit-sharing are incentive plans that are both designed to pay employees beyond their normal wages upon good company performance. The two plans are similar in that they both payout when company performance goals are met. While both plans motivate employees to do what is in the best interest for the company, the two plans also contrast in different ways.

Gainsharing links employee performance to savings resulting in payouts, while profit-sharing links financial success of the total organization to payouts. Typically, gainsharing applies to a single plant, while profit-sharing applies to the entire organization.1 With gainsharing typically applied to a single plant, employees of that plant are usually involved in the design process of the plan. A typical plan is based on comparison of a baseline performance to actual performance for a given period.2 Employees involved directly in the process are ideal for defining those baselines and metrics for quantifying both baseline and actual performance. On the other hand, profit-sharing is based on year-end profits. Therefore, the only employee involvement is typically from managers and employees who are responsible for tasks and higher level decisions that can impact the bottom line. This difference between the two plans is most likely the reason all employees are usually eligible to participate in gainsharing, whereas some groups such as union and hourly employees are sometimes excluded from profit-sharing plans.

By design, gainsharing is based on comparison of actual performance with base line performance. Therefore, employees in a gainsharing plan are more motivated and driven to improve productivity and cut costs. In a profit-sharing plan, employee motivation may be limited, since many employees feel that their impact on year-end profits for the entire company may be insignificant. Also, the drive for better performance in gainsharing usually forces employees and manager to rid themselves of the "Us vs. them" attitude so that they work together to achieve gainsharing goals3. This unity may lack when profit-sharing is the only plan in the company.

One of the key attributes of a gainsharing plan is that employees are involved, and therefore must be able to identify with the company's operations such as manufacturing methods, costs, products, prices, and customers4. This attribute is usually non-existent in a profit-sharing plan due to the lack of employee involvement. Another attribute of gainsharing is that the plan demands a high level of competence from the employees. Employees must innovate to solve problems when challenged with goals imposed by gainsharing. This competency feature is usually missing in a profit-sharing plan, since most employees are not given any performance goals.

The high level employee involvement in gainsharing typically leads the way to an "Employee Suggestion System", another attribute of many gainsharing plans. Employees to management submit productivity improvement or cost-cutting suggestions5. Typically, a review committee is responsible for identifying and implementing those suggestions, which are deemed valuable and practical to implement. Employee Suggestion Systems, on the other hand, may be difficult to implement in companies with only profit-sharing because there may be a lack of employee motivation to improve productivity or reduce costs. As for payouts, formula used for benefit payout can be directly tied to the employee suggestions that were implemented.6 On the other hand, profit-sharing formula payouts are based strictly on company profits.

Another attribute of gainsharing is that employees understand that if they help meet organizational goals, they will reap the rewards in the form of a gainsharing payout. When only profit-sharing is present, employees are often under the mindset that even if they do the necessary things to improve productivity and cut costs, management will only spend that money from those gains on new equipment or other expenditures. Furthermore, gainsharing fosters an increased focus and "make it happen" attitude7, regardless of current business levels. If business levels are relatively low, then the focus will be on cutting costs. In profit-sharing, this attitude may lack, especially when business conditions are unfavorable for yielding high profits and a resulting payout.

Design between gainsharing and profit sharing differ regarding where the savings are derived. In gainsharing, the focus is on the most important costs in a company's financials. For example, if a manufacturing company has "high touch" labor costs, then baselines and metrics will be based on improving labor efficiency8. In profit-sharing, all line items in a company's financials are used in calculating year-end profits. In gainsharing, operational measures can usually be narrow and defined. Some examples of operational measures would be parts manufactured per hour or pounds of scrap per shift9. There is also frequent feedback of results to employees; feedback can be weekly or monthly, thus enabling corrective action by employees when necessary to get back on track. In profit-sharing, feedback on company performance is typically quarterly or annually.

There are also differences in payouts between gainsharing and profit sharing. In gainsharing, payouts are typically monthly or quarterly. In profit-sharing, payouts are typically annual. Because payouts are spread out over smaller periods in gainsharing, the plan design might allow for setting aside a percentage of a payout as a "reserve" for deficit periods so that there will be some payout for any given period10. This "reserve" feature does not apply in profit-sharing. In gainsharing, the payout is often an equal percentage of compensation or equal cents per hours worked. In profit-sharing, often a percentage of payout may vary with level of compensation. Typically